Internal to External Trading Setup Explained

All right, good morning. This is David from Trader Dale, and today we’re going to go over what I believe is a staple strategy that we use here at Trader Dale, and that is simply the Internal-to-External setup, which is basically a higher-timeframe Fair Value Gap narrative to an external liquidity point.

Okay. This setup typically happens when we get displacement from a higher timeframe. So, in this case, on the left-hand side, we have the NQ hourly chart, and this was from Tuesday, October 6th. We have a Fair Value Gap created by displacement to the downside.

Okay. Anytime you get displacement on a higher-timeframe chart, either the hourly or above, typically the bias is in accordance with that gap formation. So, in this case, even though we’re at all-time highs and moving higher, this rejection candle followed by a displacement candle gives us a short-term bearish bias until proven wrong, which would obviously be an inverse above this gap, which would then favor an extended move higher.

Okay. So, when we have this Fair Value Gap, it gives us the first thing out of the three things that we need for a trade, and that is a bias. So, in this case, anytime you have a bearish 1-hour or above Fair Value Gap, when price taps into that Fair Value Gap, the initial reaction is going to be to look for a bearish move to the downside.

Okay, so that’s the one thing. So, if we are going to go lower from this level after creating this, and we have clear draws to the downside, which was this 90-minute Fair Value Gap down here, okay, then what we need is a narrative.

Okay, and the narrative is that if we’re going to go lower, where can price deliver and manipulate to? Okay, because remember, price is always searching and rebalancing to inefficiency, which is Fair Value Gaps, and then price discovering to external levels, which are pivot lows and, in this case, a pivot high.

Okay, so that gives us step two: a narrative. Where is price going? Where is price going to deliver from?

Okay, and the third thing we’re going to need is an execution. So, in this case, what we’re going to need to see is price tap into this gap and reject. If it does that, if price respects this area, it is natural that price will need to price discover in the opposite direction, which is this external low down here, an Internal-to-External move.

Going down to the 5-minute chart on the left, as we can see right around here. Okay, this was right around this candle. This is, what, 2:00? It started yesterday afternoon. So, we got an accumulation. We got a manipulation into that 1-hour Fair Value Gap, and then we got a rejection, inversing this Fair Value Gap, giving us our entry model.

An accumulation, manipulation into a higher-timeframe Fair Value Gap, taking out internal liquidity, creating an SMT with the ES contract, which is the correlated asset, and a quick inverse with momentum to the downside.

Okay, that’s our entry confirmation that this 1-hour gap is going to be respected. If this 1-hour gap is going to be respected, we are now going to target the external low right here, for a 2:1 risk-to-reward trade.

Uh, as you can see, price inversed it. The short is to go right at market. Your stop’s going to be right above that inverse Fair Value Gap. And even though it took a little while, it eventually hit its target, okay, about an hour later, down to this external low for a 2:1 risk-to-reward trade.

This is a typical, standard staple in our trading: Internal-to-External, using higher-timeframe narrative, targeting external liquidity in that direction. Okay, we confirm that with an entry model on a short-term timeframe, looking to see a rejection or basically a change in order flow from bullish to bearish with momentum, and having an accumulation, manipulation, distribution pattern at that level certainly helps as well.

Okay. You can find these setups every day in any asset class. This strategy is actually the staple of what I personally use to swing trade and day trade. There’s obviously a lot more little caveats that are added to the mix as far as what we do, okay? But if you just learn how to do this and understand this, okay, this can be a foundation for everything that you do, from day trading.

Okay, I hope this helps.

Hey everyone, it’s Dale here. I hope you enjoyed the video. If you like to trade alongside me and our team of prop firm-funded traders every day, then click the link below the video and hop aboard. We’re looking forward to trading with you.